Bailout plan to perpetuate our house of cards

Sunday

Oct 26, 2008 at 2:00 AM

The average client who seeks help at the Consumer Credit Counseling Service of Central New York has $47,000 in credit card debt and makes $37,000 a year.Not surprising, considering that living expenses are going up while wages aren’t rising to match.

Christian Livermore

The average client who seeks help at the Consumer Credit Counseling Service of Central New York has $47,000 in credit card debt and makes $37,000 a year.

Not surprising, considering that living expenses are going up while wages aren’t rising to match.

“Living expenses have jumped significantly, and people’s income hasn’t kept up,” said Karyn Dettbarn, the credit counseling company’s Albany branch manager. “People are using their credit cards to pay for their expenses.”

Government officials are touting one of the biggest potential advantages of the recently passed $700 billion bailout plan as loosening credit markets by encouraging banks to lend to consumers and each other.

Federal Reserve Chairman Ben Bernanke suggested on Monday that a new economic stimulus package should include increased access to credit for consumers, home buyers and other borrowers.

But for the past 30 years or so, as wages have not kept up with the cost of living and credit has become more and more available, consumers have been using home equity lines and other credit to finance their living expenses.

It’s difficult to make the case that credit is consciously being used as a substitute for raising wages, but even if it isn’t, is running the economy on credit a good idea?

Americans have been paying with credit since at least the 1800s, making weekly payments to sellers of clothing, furniture and other goods, and department stores and others began issuing their own credit cards in the early 1900s, but the balances had to be paid off monthly. Credit really began to take off in the mid 1960s, after the first general use credit card — BankAmericard, which later became Visa — was franchised nationally.

About ten years later, wages began to stagnate.

Related? The increased availability of credit has helped Americans make up for the lack of rise in real income, and helped them dig themselves deeper into debt.

Wages rose steadily following the end of World War II; then growth slowed in the mid-1970s. Median family income went from $47,768 in 1973 (adjusted for inflation) to $58,407 in 2006, according to the U.S. Census Bureau. But many people attribute much of the rise in household income to the large-scale entrance of women into the workplace in the 1970s.

The numbers for blue-collar workers are even worse. Hourly wage for manufacturing and non-supervisory workers barely grew at all, going from $15.12 in 1967 (adjusted for inflation) to $17.42 in 2007, according to the Economic Policy Institute and the Bureau of Labor Statistics.

And while household incomes continued to rise, so did the cost of living.

The Consumer Price Index went from 44.4 in 1973 to 207.3 in 2007, according to the BLS. In plain English, that means it cost almost five times as much to buy goods and services such as food in 2007 as it did in 1973.

Debt has risen steadily, too.

Average household debt was $27,600 in 1962 (adjusted for inflation), according to Federal Reserve Board data. In 2004, it was $79,100.

In 1959, debt accounted for 58.8 percent of a household’s disposable income. In 2007, it accounted for 141.3 percent. Of that, mortgage debt went from 37.1 percent of disposable income in 1959 to 103.3 percent in 2007, while consumer credit went from 16.3 percent of disposable income in 1959 to 25.1 percent in 2007.

Since much of the borrowing people did to finance their lives was through home equity lines, even as home values exploded the amount of equity people owned in their homes went down dramatically, from 67 percent in 1969 to 47.9 percent in 2007, according to the Federal Reserve Board. That means instead of building equity in their homes – and therefore wealth – people were using the equity to live off of.

We’re credit-dependentSome 70 percent of the U.S. gross domestic product is consumption, a “remarkably high number” that means when credit becomes tight, as it is now, the economy suffers, said HHeidi Shierholz, an economist with the Economic Policy Institute in Washington, D.C.“The actual growth of our country depends on our people spending money,” she said. “So when people are financing that spending, that consumption, through credit, when their credit then goes away, the country is going to be in trouble.”What took the credit away this time is the bursting of the housing bubble. People have been using home equity lines to live off of — home equity loans went from 5.01 percent of disposable income in 1989 to 11 percent in 2007, according to the Federal Reserve Board — so when the bubble burst, banks tightened credit lines and consumers were left with less borrowing power.Credit can be a good thing. It helps businesses bridge the gap between when expenses are due and when revenues come in, and it helps them expand, all of which creates jobs.It can also be constructive when people use it to increase wealth by buying homes and other long-term investments that give years of service and value.Credit’s become misusedBut the trend in recent years of using credit for vacations, eating out and buying clothes means people are living above their yearly income and not getting value for their expense, said Christy Caridi, director of the Bureau of Economic Research at Marist College.“It’s a relatively new phenomenon in history, and it would not be considered good policy,” she said.And because wages are not keeping pace with the cost of living, people also are using credit cards for basic expenses such as groceries, gas, even income taxes.“Some wages don’t meet basic needs,” said Sandra McIntosh, family and consumer science program educator at Cornell Cooperative Extension Orange County. “In Orange County, you can find jobs — one, two, even three — but some people have to work more than one job to be able to live. In the household, everybody’s working and contributing, but it’s just a struggle.”A credit-free world?But if we wean ourselves off credit, what happens to the economy?Less credit means fewer dinners out, fewer retail purchases, which means less revenue for businesses, which would respond by cutting jobs. Those unemployed people no longer have money to spend, which means even less revenue, more job cuts, and on and on.The solution, say economists, is two-fold: One, raise wages so people have enough to buy what they need. That’s not likely, though, because businesses won’t be keen on eating into their profits with higher salaries.“There’d be an incentive for company A to want company B to do it. ‘If someone else does it, that’s great, but I don’t want to be the one to do it,’” Caridi said.Two, workers must get a greater share in economic growth. For years, wages grew at roughly the same rate as the national economy — the gross domestic product — which meant that workers were getting a share in the growth. But in recent years, less of the GDP has gone into labor, meaning that workers are not sharing in the economic expansion.“In classic economic theory, there has been an assumption that wages would track productivity growth,” Shierholz said. “They’re not. That’s huge.”clivermore@th-record.com

Some 70 percent of the U.S. gross domestic product is consumption, a “remarkably high number” that means when credit becomes tight, as it is now, the economy suffers, said HHeidi Shierholz, an economist with the Economic Policy Institute in Washington, D.C.

“The actual growth of our country depends on our people spending money,” she said. “So when people are financing that spending, that consumption, through credit, when their credit then goes away, the country is going to be in trouble.”

What took the credit away this time is the bursting of the housing bubble. People have been using home equity lines to live off of — home equity loans went from 5.01 percent of disposable income in 1989 to 11 percent in 2007, according to the Federal Reserve Board — so when the bubble burst, banks tightened credit lines and consumers were left with less borrowing power.

Credit can be a good thing. It helps businesses bridge the gap between when expenses are due and when revenues come in, and it helps them expand, all of which creates jobs.

It can also be constructive when people use it to increase wealth by buying homes and other long-term investments that give years of service and value.

But the trend in recent years of using credit for vacations, eating out and buying clothes means people are living above their yearly income and not getting value for their expense, said Christy Caridi, director of the Bureau of Economic Research at Marist College.

“It’s a relatively new phenomenon in history, and it would not be considered good policy,” she said.

And because wages are not keeping pace with the cost of living, people also are using credit cards for basic expenses such as groceries, gas, even income taxes.

“Some wages don’t meet basic needs,” said Sandra McIntosh, family and consumer science program educator at Cornell Cooperative Extension Orange County. “In Orange County, you can find jobs — one, two, even three — but some people have to work more than one job to be able to live. In the household, everybody’s working and contributing, but it’s just a struggle.”

But if we wean ourselves off credit, what happens to the economy?

Less credit means fewer dinners out, fewer retail purchases, which means less revenue for businesses, which would respond by cutting jobs. Those unemployed people no longer have money to spend, which means even less revenue, more job cuts, and on and on.

The solution, say economists, is two-fold: One, raise wages so people have enough to buy what they need. That’s not likely, though, because businesses won’t be keen on eating into their profits with higher salaries.

“There’d be an incentive for company A to want company B to do it. ‘If someone else does it, that’s great, but I don’t want to be the one to do it,’” Caridi said.

Two, workers must get a greater share in economic growth. For years, wages grew at roughly the same rate as the national economy — the gross domestic product — which meant that workers were getting a share in the growth. But in recent years, less of the GDP has gone into labor, meaning that workers are not sharing in the economic expansion.